Companies struggle to get deposit insurance

Even though the Companies Act 2013 mandates companies to have deposit insurance for deposit schemes, they are still struggling to find an appropriate product in the market.

Insurance companies consider this a risky proposition, due to which no such product is being sold in the market.

Presently, deposit insurance is only offered to banks through the Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly owned subsidiary of Reserve Bank of India (RBI).

The companies through industry chambers and bodies have approached the corporate affairs ministry to initiate a process wherein an insurance cover can be offered to them also.

Senior officials of the ministry of corporate affairs (MCA) said that they had written to both RBI and insurance regulatory and development authority of India (IRDAI) to seek a solution to this issue, after industry bodies sought insurance covers for the non-bank companies too.

The insurance regulator was also asked, said MCA officials, if they could request insurance companies to launch such policies for these corporates.

All commercial banks including branches of foreign banks functioning in India, local area banks and regional rural banks are insured by DICGC.

DICGC insures all deposits such as savings, fixed, current, recurring deposits except deposits of foreign governments, deposits of central/state governments, inter-bank deposits, deposits of the state land development banks with the State co-operative bank among others.

Each depositor in a bank is insured up to a maximum of Rs 1 lakh for both principal and interest amount held by him in the same right and same capacity as on the date of liquidation/cancellation of bank’s licence or the date on which the scheme of amalgamation/merger/reconstruction comes into force.

Deposit insurance premium is borne entirely by the insured bank. If a bank goes into liquidation, the DICGC is liable to pay to each depositor the amount of his deposit up to Rs 1 lakh within two months from the date of receipt of claim list from the liquidator.

Meanwhile, IRDAI officials have said that deposit insurance will be offered by insurance companies only if it is commercially viable for them. Insurance companies will not be mandated to offer a cover.

The General Insurance Council, the umbrella body of the non-life insurance companies, is working on mechanisms to resolve this situation. They would look into whether such a product would be viable and what would be its pricing among other issues.

Insurance company executives said that there is an issue of financial failure, due to which they are not very comfortable with launching such a product.

A senior general insurance company official added that there were high risks associated with the product and if they were mandated to launch products, large claims would affect their books.

Moreover, it is difficult to gather an estimate of the amount raised through deposit schemes as the companies which are involved in it are from diverse areas and completely spread out, said V. Balaji, Partner, Deloitte Haskins & Sells.

The corporate affairs ministry had said last year that in view of the suggestions received from the stakeholders to give transitional period for complying with the deposit insurance requirements, the amendment in the relevant rule has been made, allowing companies to accept deposits without deposit insurance for one year, till March 31, 2015. Experts are of the opinion that MCA will have to extend this deadline for one more year as there are no products available.

However, even as the deadline is just a few weeks away, there is no clarity on who would be the appropriate body to provide the cover. Insurance companies are not too keen to provide a cover on an immediate basis.